Understanding when your credit card’s interest rate can change is crucial for effectively managing your finances. Your annual percentage rate (APR) determines how much interest gets tacked onto your outstanding balances each month. Even a seemingly small APR increase can add up to paying significantly more over time. So what situations might cause your APR to shift? Let’s dive into the details.
Variable APR Changes Based on Index Rate
Many credit cards come with a variable APR that fluctuates based on an index rate like the prime rate. As economic conditions change, that index rate goes up or down – and your variable APR follows suit.
For example, let’s say your credit card APR is calculated as the prime rate + 13.99%. If the prime rate is currently 3.25%:
- Your current variable APR = 3.25% + 13.99% = 17.24%
However, if the prime rate increases to 3.5%:
- Your new variable APR = 3.5% + 13.99% = 17.49%
So a 0.25% increase in the index rate results in your APR going up by the same amount. Be sure to check your credit card’s terms to understand exactly how variable APRs are calculated.
Penalty APR Increases After Violations
Credit card companies can apply a penalty APR as a punitive measure if you violate the terms of your agreement. Penalty APRs are significantly higher than standard purchase APRs – often over 29.99%.
Common violations that may trigger a penalty APR include:
- Making a late payment
- Going over your credit limit
- Having a payment returned due to insufficient funds
- Committing fraud or other illegal activities
Your credit card company is required to provide written notice of an impending penalty APR at least 45 days in advance. The higher rate can then be applied to both your existing balance and new charges.
Penalty APRs can remain in effect indefinitely. However, you may be able to get it removed by bringing your account back into good standing and making timely payments for 6+ consecutive months.
Introductory & Promotional Period Expirations
It’s common for credit cards to offer enticing 0% intro APRs on purchases and/or balance transfers for a set period of time – typically between 6-21 months. Once that promotional period ends, however, your “go-to” APR kicks in. This go-to rate is the standard purchase APR laid out in your credit card’s terms.
For example, if your card offers 0% APR for 15 months on purchases, but then has a 16.99% variable go-to APR – that higher rate will start applying after the 15 month period concludes.
The same goes for promotional balance transfer APRs. If you transferred a balance to a card with 0% APR for 18 billing cycles, the higher regular APR starts accruing once that 18th billing cycle ends.
Be sure to make a note of when introductory or promotional periods expire so you aren’t caught off guard by a sudden APR increase.
Credit Score Changes Can Impact APRs
Credit card interest rates are heavily based on your credit risk profile. Those with higher credit scores tend to qualify for lower APRs, while consumers with subprime credit get stuck with more expensive interest rates.
As a result, changes to your credit score may cause your APR to be re-evaluated and adjusted – either upwards or downwards. Exactly how APRs align with credit score tiers can vary across different credit card issuers.
Here’s one example from a major bank:
Credit Score RangeAPR Range720+13.99% - 23.99%660-71916.99% - 24.99%600-65920.99% - 25.99%Below 60024.99%
So if your FICO score dropped from 750 to 680 after missing some payments, your APR could shift from the lowest tier up to the higher 16.99%-24.99% range. Conversely, raising your score from 630 to 700 might help lower your APR.
“Ensuring your credit score remains in the highest tier is one of the best ways to lock in a low APR long-term.” – Personal Finance Expert, Mint.com
State Law Regulations on Changing APRs
In addition to the scenarios above, certain states place legal restrictions around when credit card companies can adjust APRs, especially on existing balances. Regulations vary across different states but generally aim to protect consumers.
For example, in New York, credit card companies cannot increase APRs on existing balances unless the increased rate is clearly disclosed at account opening. Other states like Illinois and Indiana prohibit APR increases on existing balances unless the customer is over 60 days late on a payment.
Since these state laws frequently change, your best resource is to check with your state’s consumer protection office or attorney general’s website for the most up-to-date regulations in your area:
Being aware of any special state laws can help ensure you aren’t subjected to unlawful APR hikes by your credit card issuer.
Conclusion
From variable rates tied to index changes, to penalties for violations, expiring promotional periods, credit score impacts, and state regulations – there are several key situations where credit card companies can legally adjust your APR.
Staying on top of potential APR shifts is critical, as even a moderate increase can make maintaining balances considerably more expensive over time. Be sure to carefully review your credit card’s terms and watch for any change-in-terms notices to keep your APR as low as possible.
Howdy, editor at FinanceEon.com, brings over a decade of financial journalism experience. He ensures accuracy and insightful analysis, guiding a team on market trends and investment strategies.
